China, Wine, and Tariffs

Jim Boyce’s ebullient, edifying Grape Wall of China blog (yes, about wine in China) has an interesting take on China’s imposition of an additional 15% tariff on American table wine. In two recent posts (see here and here), the latter a direct response to a pot-stirring story on Al Jazeera, he basically tells everyone to chill out.

It’s not that the tariffs won’t hurt the U.S. wine industry – they will. But they need to be viewed in context. As Boyce explains, only a small percentage (about 12.5%) of U.S wine is exported, and of that only 3.7% went to China. In short, only 0.4% of U.S. wine goes to China and will be subject to the additional tariff.

Moreover, U.S. wine has been facing headwinds in China for several years. From 2011-17, China doubled the amount of wine it imported, but the U.S. market share of those imports fell by more than 50%, decreasing in actual numbers from 16.1M liters to 14.2M liters. The problems U.S. wine faces in China are complex and multi-factored, and often intertwined with historical, political, or cultural backstories. Other countries (particularly France) were early entrants to the Chinese wine market and have retained a huge first mover advantage. Other countries spend more money on marketing and brand presence in China. And let’s not forget that even before China imposed the additional 15% tariff, U.S. wine already faced a 14% tariff, unlike wine from countries with China free-trade agreements (such as Chile, New Zealand, and Australia). Like I said, selling wine in China is complex. I could write a whole month of blog posts about it.

None of this is to minimize the very real pain some American winemakers (as Boyce notes) are feeling. Different winemakers have different selling strategies, and some have invested substantial amounts in developing or maintaining their market presence in China. At a conference I attended years ago, a high-end Napa winemaker told a cautionary tale about how he had been approached by several Chinese buyers who wanted to purchase the winery’s entire production run for the year (presumably to serve as the in-house wine for a large state-owned enterprise). It was a cautionary tale because such sales would be one-offs, providing a large cash infusion but with no long-term benefit, because there wouldn’t be any repeat purchases and little to no increase in brand awareness. The only way such a deal would make sense is if the winemaker was about to retire. Instead, the way to succeed in China was to cultivate distributors, retailers, and consumers who would become long-term brand adherents. And that takes time, money, and patience.

If you take a step back and look at these tariffs from China’s perspective, it’s pretty clear they are a win-win. They get to strike back at Trump in a highly visible, prestigious area of commerce. Chinese consumers are (for the most part) unaffected, because they have numerous credible alternatives available from countries with which China is not in a trade war. Meanwhile, the effect in the US is in states that overwhelmingly oppose Trump in any event: the top 5 wine-producing states – which control more than 96% of all production, are California (at 80%), Washington, Georgia, New York, and Oregon. And Georgia’s production in 2017 seems anomalous, rising more than 140% from 2016 according to the Alcohol and Tobacco Tax and Trade Bureau. (But even if the 2017 numbers are accurate, Georgia only accounts for 4.4% of US wine production.)

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We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.